In classes on VC professors often talked about the debate about whether team or market was more important in venture capital. At VC confidential they have a typical discussion of whether it is the Horse or the Jockey. Very famously Don Valentine of Sequoia has said that he looks for big markets and then worries about the team. A couple of quotes:
"I like opportunities that are addressing markets so big that even the management team can’t get in its way."
"I am 100% behind my CEOs right up till the day I fire them."
I used to take this as bit of an academic debate, kind of like a discussion on different religions or scientific theories that were likely to stay unproven but valid. That was until I heard Irwin Federman‘s thoughts on the subject. Like many things profound, after you hear it you know it’s correct because of its simplicity. You think, ‘Well that’s obvious, I could have told you that.’ At least in this case, I found this to be powerful.
Irwin said that whether it is the market or the team that is important is really a function of you as the investor. To be able to rely on the market size you need to be able to determine that the CEO is the problem early, make the decision to move on them, and then convince the board to follow you in pulling the trigger. Irwin said: "You have to be very honest with yourself, and if you’re not that type of person it doesn’t make you bad. But it does mean that you are betting on a team."
So if you’re like Don Valentine – you have the clout on the board to fire a CEO and have the Rolodex to replace them with an A player – then you can rely on big markets. But if either you don’t have the foresight or will to fire a CEO, or the juice to get the board to follow you, then your are essentially making a bet on the team, and so you better be able to trust them.
So obvious, once someone beats you over the head with it.
